Most property investors start with residential — houses, units, apartments. But as portfolios grow, many start looking at commercial property: shops, offices, warehouses, medical suites.
The two asset classes have very different characteristics. Here's a structured comparison to help you decide which fits your strategy.
Yields
| Type | Typical Gross Yield (Sydney) |
|---|---|
| Residential (inner suburbs) | 2.5–4.0% |
| Residential (outer suburbs) | 4.0–5.5% |
| Commercial retail/industrial | 5.0–8.0% |
| Office (smaller) | 5.5–7.5% |
Commercial yields are generally higher — but this reflects the higher risk and vacancy cost when a commercial tenant leaves.
Lease Terms
Residential: 6–12 month leases, with rolling month-to-month after. Tenant turnover is common.
Commercial: Typically 3–10 year leases with options. Long-term leases create income stability — but when a commercial tenant leaves, finding a replacement can take 6–18 months (or longer).
Outgoings
In most commercial leases (particularly gross or net leases), the tenant pays rates, insurance, water, and sometimes maintenance. This significantly reduces the landlord's out-of-pocket costs compared to residential.
Some commercial leases include CPI-linked rent reviews every 1–3 years, providing inflation protection.
Capital Growth
Residential property in Australian capital cities has a strong long-term capital growth track record. Commercial property growth is more variable — dependent on economic cycles, tenant demand, and area rezoning. Inner-city commercial has performed well; suburban retail has struggled.
Considering a commercial property investment?
Commercial lending is different — get advice on what lenders look for and how to structure the deal.
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Financing: Key Differences
| Feature | Residential | Commercial |
|---|---|---|
| Maximum LVR | 80–95% | 65–75% |
| Interest rates | Lower | 0.5–2% higher |
| Loan term | 25–30 years | 10–25 years (P&I) |
| Assessment basis | Borrower income | Rental yield + income |
| Lender choice | Broad | Narrower |
Commercial loans require more equity from the outset. The lower LVR means you need a larger deposit — typically 25–35% rather than 20%.
SMSF and Commercial Property
One significant advantage of commercial property: if your SMSF buys a commercial property, you can lease it back to your own business at commercial market rent. This is not permitted with residential property, where SMSF members cannot occupy the asset.
Which Is Right for Your Strategy?
Consider residential if:
- You want lower deposit and broader lending options
- You prefer stable tenancies with fewer vacancy risks
- Your focus is capital growth over income
Consider commercial if:
- You have substantial equity (can fund 30%+ deposit)
- You want income-focused investments with positive cash flow
- You have an SMSF that can purchase the property
- You want longer lease security
Considering commercial property investment?
We advise on commercial and residential investment lending across Sydney. Get a free assessment.